Investing Billions - E8: Apurva Mehta, Managing Partner of Summit Peak Investment | How the Top 5 Companies Drive 50% of Returns, Why Fee Sensitivity is Foolish, and Why Family Offices are the Best LPs

Starting point is 00:00:00 I think it's 542 companies in the portfolio. The top 25 represent 77% of our fair market value. As of March 31st, which was net of a 3x return, the top five represent 50% of the fair market value. So the power law in a portfolio of 540 companies is it still works. Aparva, I've been excited to chat with you since Julian Shapiro of Julian Capital recommended you to the show. Welcome to Limited Partner Podcast. Thanks, David. Thanks, Eric. Thanks. Really appreciate you having me on here. Thank you. So you've had an interesting journey from working in banking and as an institutional investor and endowments to co-founding an early stage fund of funds at Summit Peak. Why did you decide to go from the institutional world to now co-founding Summit Peak Partners? So about a decade ago, we were building out a children's hospital endowment portfolio,

Starting point is 00:01:03 Cook Children's. We invested across all asset classes and we were starting out a children's hospital endowment portfolio, Cook Children's. We invested across all asset classes and we were starting a venture program from scratch. And our thesis on venture was go earlier and sort of identify the next generation of fund managers. And so we started that in 2012, really looking at pre-seed and seed investing as a way to tap into the asset class, which has always been access constrained for investors. And so, you know, after six, seven years of building that at the Children's Hospital, you know, we really wanted to tap into our network. And we had a number of family office investors that said, you know, if you build it, you know, we'll come. So we, you know, we decided in 2018 to spin out of the children's hospital and really focus,

Starting point is 00:01:51 you know, on one asset class only. And specifically within that, you know, the early stage niche. You were one of the early, really investors in the early stage niche from an institutional standpoint, almost there for a decade. One criticism of early stage funds is that it's very difficult for them to compete against the kind of the 800 pound gorillas, the Andreessen, Sequoias. Why is it that pre-seed and seed and solo GP funds are able to compete with these large platforms? A decade ago, you know, people were spinning out of brand name firms, the Sequoias and Andreessons of the world and Founders Fund, et cetera,

Starting point is 00:02:27 because they wanted to be small and nimble. And really as an operator led VC, somebody that can really help a founder get from seed to series A, the red tape of investing at a brand name firm was frustrating people. And at the end of the day, seed stage investing is about investing

Starting point is 00:02:45 in people more than anything. And our view was those firms, while they weren't the 800-pound gorilla in the room or the brand name, it's exactly what an entrepreneur needed at that stage, where you could devote time and attention to a handful of portfolio companies really helping them get from C to Series A. Obviously, the market has exploded in all segments of a venture, but we believe that this segment is going to gain more traction over time just because that is exactly what entrepreneurs need in this environment, helping you get from that initial stage to Series A and your product market fit. I think investing early stage, I think it's very important to have founder experience and

Starting point is 00:03:31 operator experience. But from an LP perspective, from an investor perspective, a cynic might say, yes, the early stage returns are higher, but that's because of higher beta versus true alpha. How do you separate the alpha in the early stage versus beta? That's a good question. I, you know, in, I think if you were to segment the market into the last decade, we've been in general, there was a period of alpha overall, where managers across segments were producing alpha in every segment of venture. And then you take the sort of 2018 to 2022 time horizon, and we were in a beta segment of the market. And because of a zero interest rate environment, any company could get funded and everyone theoretically had access.

Starting point is 00:04:24 And so our view is we believe we're entering the alpha stage of the market back again in all stages of VC. If you look at the early stage segment specifically, to your point, when you look at the data and you look at 20 years of IRRs, the early stage segment has performed better than all the other asset classes. Ultimately, access to those deals matter. When you look at the top quartile of returns, it's having access to the GPs that are able to get you into those companies. Our view is it's not it's not beta per se. When you're looking at the returns, it's more of who has access to, you know, those what will be breakout companies.

Starting point is 00:05:10 How do you think about seed firms versus multi-stage firms in terms of who is most likely to outperform at seed? How do you compare the two? We believe in the focus. I mean, it's why we solely focus on early stage. And then even within that, we're even pretty niche within the early stage segment. Multi-stage firms are, you know, they're here to stay. If you read every headline, it shows that everybody's moving earlier and earlier. It's probably because where they see

Starting point is 00:05:36 that's where dollars deployed is going to generate that alpha because the price arbitration between, you know, a private company at the seed stage, and as you get later and later into, you know, later stages to a public market that that price arbitration in a non zero interest rate environment is dissipating. And so, you know, multi stage firms are moving earlier. But when we look at the difference between a multi stage firm and a seed stage firm, and when we talk to founders, ultimately, at the end of the day, the references that we do are with founders. It's the time and attention that a solo GP or two GPs can give a founder to walk them through

Starting point is 00:06:18 every stage of that company's inception. One of our GPs describes it as just being their therapist to hold their hand when they're sort of crying through the night on various problems, even if it has nothing to do with how they get their next customer. So the difference really from a multi-stage firm investing at the seed stage, those are option checks in our opinion

Starting point is 00:06:42 for investing more and more dollars at later stagesist, and he has access to a 15,000 startup data set. And one of the things that he found was that a lot of that, a lot of what we consider signals like Stanford MBA, Harvard MBA, are essentially arbed out through beta because there's a bid up. It's an efficient market. What are some of the inefficiencies in the market? So you mentioned time and attention, but how do early stage managers able to extract alpha in a sustainable manner today? to portfolio as a seed stage firm. We truly believe that when we meet a new firm that they have to have thoughtful portfolio construction and the mindset around that. Valuation discipline and ownership discipline is another piece that we believe differentiates firms at the early stage. In the pandemic era and zero interest rate era of free capital, everyone could get into any deal and get access and be able to write a 250k check into what I described as the beta market.

Starting point is 00:08:14 However, in the market environment we're in and the one that I've known historically, it was really about discipline in investing in founders that you understand what their skill set is. Are they a technical founder? Are they a CEO? How are they building their team? And then applying sort of discipline to how much you want to own upfront and valuations within a bandwidth. And so we believe that that's that differentiates between,

Starting point is 00:08:45 you know, what you described as kind of that that beta in the market. I think portfolio management is one of the most underrated skills, especially at the early stage. One thing that I've seen, and we've talked about this with Eric at length is doing the unscalable what Paul Graham famously told YC founders is do what doesn't scale. One example, of course, is this podcast, we put in a lot of times we get a sustainable advantage from media, we see individuals creating networks, we see people having blog posts, all those things, something that's hard is almost inherently going to be a source of alpha and competitive advantage. So so moving on a little bit to solo GPS. And again, you get full credit for being really early to this. You are in

Starting point is 00:09:24 some of the top solo GPSPs at the very early stage. Ray Tonzing from Caffeinated Capital, Jack Altman from Altman Capital Fund. What is it that you saw in these two solo GPs early on that you thought would make them great? And how were you able to predict that? So luck and timing is part of everything. You know, in 2012, the market was pretty nascent in early stage VC and seed stage VC specifically. You know, back then they were called micro VCs. And obviously we've had many name shifts.

Starting point is 00:09:56 You know, solo capitalist was coined in 2020, I want to say. But, you know, we've been backing what are micro VCs, micro VCs now for the better part of a decade. Going back to the thesis, be earlier than everyone else and let the brand name firms follow on. That relies on access to the right companies. When we started this effort a decade ago, it was, what are the networks and ecosystems that matter and who has access to them? And what is their edge in that deal flow? And is that edge sustainable and repeatable? In 2012, when we were starting to look at this space, we were introduced to Ray Tonsing. At the time, Ray has both an operator background, but being helpful to founders,

Starting point is 00:10:52 sort of checks every box of being that solo GP. I mean, he's expanded since, but solo GP on being nimble and being helpful to founders, which is what we learned in our reference calls. At the time, it was what network is Ray playing into? And, you know, now when you fast forward, you know, 10 years or 11 years, when I say networks and ecosystems that matter the most, we think of it as, you know, a tree with many branches. And when we meet a new GP, you know, how does it overlap with, you know, this tree that we have in place? And or what gaps do we have in the market that, you know, that we're not covering if we meet somebody new? 10 years ago, we were starting fresh. So it was really, you know, Ray was tapping into the YC ecosystem, which we felt was,

Starting point is 00:11:35 you know, a valuable place. And we still believe it to be valuable in the market. You know, he was very close and had a special advisor, Max Levchin, you know, who was personally investing. And as part of our initial diligence on Ray, it was all of those things. There were no portfolio construction models in place in 2012 for seed GPs. But it was, how are you going to build this? What does the future of this firm look like?

Starting point is 00:12:01 And really, that mindset of do whatever it takes to help these founders. And that was what we saw in Ray then. If you fast forward, we backed Jack Altman in his first fund. You know, we were introduced through our network, many of our new GP introductions come through our network, whether through a founder, or an existing GP of ours. You know, those are the best introductions. You know. We love meeting any new GP, but when they come through our network, we place a high value to that. And we had known about Jack through an investment in a company called Teespring, which we were invested in. We had known about Jack through an investment in a seed investment

Starting point is 00:12:42 in Lattice, which we were invested in. And so when multiple of our GPs said, hey, Jack's raising his first fund, you should have a conversation. It was an easy first call. And we had known about his network. It was tapping deeper into networks that we might have scratched the surface on and bringing new industries that we weren't covering through other GPs. We ended up being one of Jack's early investors and among a few. And we've been strong supporters of him and he's been a valuable resource to us as well since then. When you look at your set of GPs, how do you think about generalist for specialist firms? Or how do you think about your own portfolio construction in terms of picking the different types of GPs that you work with? So when you look across our portfolio, we have a dozen core GPs. We segment

Starting point is 00:13:30 our portfolio into three buckets, core general partner relationships, which are now managers that we've been backing for the better part of a decade. That represents 60% of our portfolio. Then we back six to eight new GPs in every fund cycle. We call those scouts. And a scout to us is a new GP relationship. It's likely a fund one. It's likely very small, anywhere from five to 20 million, could be 2 million. But it could be a fund two. It's new to us, which means we want a date for their vintage and ours until we, you know, we scale it up to a core allocation or not. And then the last, last piece is 30, you know, 30% is direct investments into companies. So when you look across our core and scout managers, the majority of them, you know,

Starting point is 00:14:17 I would say are generalist, but with a sector specialty. So thinking about, you know, thinking about Ray, you know, enterprise software, fintech, health tech. So yes, he's a generalist. He has some frontier tech in his portfolio. He has prop tech in his portfolio, but he has three core segments of all of his portfolios going back, now five funds. When we think about new GPs, we don't mind sector specialists. We think there are some industries where you need them. We have them in fintech. And that's a very specific area where understanding financial services and where companies are selling into interest rates, it really helps having specialists in that space. We have had an AI specialist in our portfolio before AI was a,

Starting point is 00:15:06 you know, was a term and it was just called machine learning. And so that, you know, since 2015, I would say we bias towards operator led, because that's really what's going to be the value towards a founder, and with less bias towards sectors. So most are generalists, but we, you know, we don't mind having sector specialists in the portfolio. Hey, we'll continue our interview in a moment after a word from our sponsors. The Limited Partner Podcast is proudly sponsored by AngelList. If you're a founder investor, you'll know AngelList builds software that powers the startup economy. AngelList has recently rolled out a suite of new software products for venture capital and private equity that are truly game changing. They digitize and automate all the manual processes that you struggle with in traditional fundraising

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Starting point is 00:16:02 for cap table management. It's a modern, intelligent equity management platform that offers equity, issuance, employee stock management, 409A valuations, and more. I've been a happy investor in AngelList for many years, and I'm so excited to have them as a presenting sponsor. So if you're ready to level up your startup or fund with AngelList, visit www.angellist.com slash TLP. That's AngelList slash TLP to get started. Back to the show. Ray Tansing, who I think is one of the best in the business, is an interesting story because it's someone who doesn't have a decorated operating background. And he's also not a

Starting point is 00:16:36 world expert in any specific category, yet he's crushed it. It's because he's network driven, and he provides excellent service to his entrepreneurs. Talk about that. Absolutely. I mean, he was an underdog that's built an amazing network. Later this week, we're flying to see him and just going to catch up over dinner. But we asked the question, a lot of GPs have left San Francisco. And I'm of the mindset that if you have the right network, you can live anywhere. Your network is going to drive your deal flow. But Ray is one that has been tried and true still, lives in Pacific Heights, offices out of the same place. And it's because if a founder texts him at 9pm and says, Hey, can you go for a walk? He wants to be available. Not, I can catch a flight tomorrow

Starting point is 00:17:23 and I'll see you tomorrow. Ray wants to be available. And that really resonates with founders, being available to them at any hour of the day. And so we love Ray's story. A lot of people can poke holes at solo GPs and the growth of their firms. He has stayed true, in our opinion, to what we believe is his core skill set. He's expanded to building his firm into a multi-stage firm. But at the same way, he's done it thoughtfully. Many GPs are struggling to find how they bring the next generation of deal flow in. As you get older and older, I fall into this as well. How do we meet the 22-year-old fund manager GP? If I'm not on the ground every day in San Francisco, sure, we have our network. And Ray has done it thoughtfully than most other managers.

Starting point is 00:18:17 Some managers, and we don't fault them for it, but they'll invest personal dollars and other funds as a way to scout deal flow. But Ray takes it on his reputation of putting his brand and his firm name, and that's a lot to raise LP capital and put your name on every single thing that you do. When you're diligencing emerging managers and doing reference calls, what exactly are you looking for in those reference calls? What are you trying to suss out? So the founder reference calls are probably the most important. I remember when we were backing Ben Ling at Blink Capital, we did as many reference calls as I've ever done on Ben from both on his reference sheet, as well as off his reference sheet. How many reference calls? 50 plus.

Starting point is 00:19:06 My partner, Patrick, and I, we split it up. We both take different people. And then we come back and we try to understand and pick apart what are the people saying? And just what are their skill sets that they're bringing to the founders? And going back to what I said earlier, how repeatable is this? How are they going to help that founder from that seed to that series A and the repeatability of it? Before that point, though, what we truly are looking for in a fund one relationship is what does this look like, not in fund one and 10 years out from fund one, but how do we feel comfortable backing this into

Starting point is 00:19:47 fund two, fund three? Because we truly want to graduate our scout managers into core allocations. And there are, of course, core allocations that will drop out of our portfolio. And generally, it's because people have style and strategy drift. They have a box that they should be operating in, and they expand out of that box in various ways. So when we're backing a new GP relationship, we're trying to underwrite beyond the, as I said, table stakes of thoughtful portfolio construction. It's where do we see this firm in vintage two 2, Vintage 3, and the mindset of how they're going to grow the firm, how they're going to be incentivized, how do they incentivize people that they add to the team? And we're diligencing a new manager right now.

Starting point is 00:20:34 And that's where we're spending all the time. We've done all the founder reference calls. We're not investing just for this vintage. We're trying to build a relationship for multiple you know, multiple vintages out. And you mentioned style drift as a negative signal for maybe not re-upping. What are some positive signals? Obviously, the data doesn't really come until their fund three, which is always the problem with investing in venture. What are some positive leading indicators of you to re-up from a fund one to a fund two and fund three?

Starting point is 00:21:01 In the 2012 to 2018 era, there was not a lot of data either from fund one to fund two. I mean, in the 2018 to 2022 era, there was plenty of data because there was lots of up rounds. So, you know, portfolios were marked heavily. And so, you know, you could easily see the TVPI. I would say, as we underwrite a fund one, it goes back to what is the network that they're tapping into? And we're underwriting where are they going to be getting their deal flow, the kinds of companies that they're backing, the entrepreneurs they're backing, how are they sourcing those deals? So when we come back to a fund two, there's generally no data. I mean, you know, if a fund two comes out within two years of a fund one,

Starting point is 00:21:45 in this environment, you're going to see very little in terms of markups in a portfolio. So you barely can even see the co-investor syndicate that everyone puts on their presentations of we invest alongside the best. And so we're really just understanding, has the thesis stayed the same? Have they executed on what they said they were going to do and build in their first fund from a valuation and ownership perspective portfolio concentration how have they helped these founders we go back and we talk to the founders that they've backed i don't know if it's like this in other industries but founders are very willing to share um you know just sort of who's helpful on

Starting point is 00:22:25 the cap table, who's not, you have to read between the lines, you know, in a lot of these cases. So from a fun one to a fun two, I would say it's pretty clear for us in terms of so long as there is no negative style drift. It's tricky when it gets from fun two to fun three, because there still is very little data. And that's where you start seeing the fund size grow, because of, you know, now a more institutional in quotes, landscape being able to look at it from a, you know, the size of the new firm. And so that's where it gets tricky to, you can start seeing co investors, going back to the thesis, we like seeing the brand name firms and like seeing companies doing well and raising up rounds. We value seeing that sort of portfolio progression amongst our funds. But it's then coming back to

Starting point is 00:23:12 how is fund three differed from fund two and fund one? And is it consistent with the strategy? And in most cases in our portfolio, we have a very low sort of attrition of core managers. I mean, most stay true to what they say they're going to do. So you mentioned attrition. It's an interesting metric. A lot of times GPs ask me, what could I ask of LPs? And what differentiates LPs? What would you ask LPs in your diligence of them if you were a GP in this market? Honestly, it's long term nature of, you know, why you're at the institution you're at. We sit on the LP advisory boards of most, if not all of the GPs that we work with. And, you know, when we started Summit Peak, people loved us as an LPs

Starting point is 00:24:01 for a children's hospital for multiple reasons. A, we had the ability to invest with discretion into fund zeros and fund ones and build out a venture portfolio. B, there was a good cause behind it. Everyone loves a good LP. But when we started Summit Peak, most of our GPs loved us more, all of them. And the reason why was because they knew that we were stickier capital than we ever were before. And so if I'm a GP, I am a GP, you know, when I think about a, you know, an investor that I'm looking or I'm talking to, whether it's a family office or endowment foundation, I think about, is this the last check that I get from this investor?

Starting point is 00:24:45 Is the entire team going to turn over? Because we understand the dynamics of the endowment foundation world. We understand the dynamics of the family office world. So we think a lot about what does this LP look like in our next vintage cycle? If we do everything we say we're supposed to do, the numbers are there, you know, and we've executed on a laid out plan, the money should easily come in the next vintage. And so as a GP raising their fund one, fund two, fund three, it's, it's understanding kind of that stick-to-itiveness nature of, you know, kind of who's across the table and how institutional is the process so that it can carry on if someone leaves? I think stickiness is the exact factor. So

Starting point is 00:25:32 GPs would like to know, Porvo, what is a good stickiness rate? What is a good follow on rate for an ALP for a BLP in the market? I mean, for an ALP, if the GP does everything they're supposed to do, it should be 100%. I mean, it's been in our core portfolio. Counting for the fact that the average GP does not necessarily do that, what is a good industry rate or rule of thumb? Three or four funds before they stop committing. Moving on to the market today, it's Q3 2023. It's not pretty out there. We had Samir Khaji from Allocate mentioned that there are several thousand funds and he believes up to half of them might be reset and might no longer be there. What do you think about the market moving forward and what percentage of solo GPs and first time managers will stay in the game and which ones are going to go find other careers or other paths. I mean, Samir has been in the space a long time. You know, we've we've we've seen the space evolve since 2012. In 2018, when we were raising our first fund, we started talking about tourist capital, the market is not pretty out there.

Starting point is 00:26:38 And it's probably the worst I've seen in my career, graduating school during the dot-com era to investing for the Juilliard School in 2008, and then building a venture portfolio from 2012. We've seen plenty of bubbles or mini bubbles. 2018 was no different. People were questioning the valuations of Uber and many high-flying startups and soft banks flooding the market with capital. And we started talking about tourist capital then. And we wrote a letter to investors and said, it all changed with the pandemic. But we said that we believe that tourist capital would exit the market. We believe that today too. The pandemic made it easier to start a fund than to start a company even. And so entrepreneurs,

Starting point is 00:27:26 or to do it on the side, you know, founders backing founders, you know, you can be a founder running a company and have a $25 million fund on the side. We're in the same camp as many other people that believe tourist capital will exit the market. I wonder where I started off the call. This next decade is going to mark a return to VC that brings back the mindset from founders of truly being picky of where they take their capital and who's going to help them, as well as funds being discerning of where they're placing that capital. If there's 3000 firms in the market, there will be a lot of zombie GPs out there where they've raised a fund one and a fund two on AngelList over the last three years, but we'll never be able to get a fund three off

Starting point is 00:28:12 the ground. And you mentioned tourist capital. I like that term. Let's call out people, not individual investors, but asset classes from most desirable to least desirable asset classes? So I'll start with our investor base. Family office is 30-40% of our capital. And then multifamily office RAA is another 30% of our capital, 20% endowment foundation, and then, you know, call it the remainder ultra high net worth. We like working with single family offices and even multifamily offices, RAs. When you find a good family office that believes in what you're building, whether you're a fund of funds or just a venture GP, they can be truly valuable partners to you. They're backing your funds in size. They are good co-investor capital, which we value because not only do we co-invest out

Starting point is 00:29:08 of our fund, we also show co-investment opportunities to single family offices. Going into the next segment, I would put single family offices as the most desirable because of their entrepreneurial nature. And they understand kind of the risk reward dynamics of the asset class. The multifamily office RAA space is probably the biggest growing segment of the market, probably where we bang our heads against the wall the most because no two RAs look alike, and they have very, very different investment processes processes working through those processes over time and and showing the value of a fund of funds approach or why build out a direct venture program if you're

Starting point is 00:29:53 just a you know if you're a venture manager looking to sell into that space and then endowment foundation it can be great money you know and i put it third still we love the endowments and foundations we work with they're phenomenal partners partners, they're co investors alongside of us. But that segment of the market is largely controlled by consultants. And, you know, it's a, it's a another challenging, you know, landscape to navigate. Yeah, I assume there's different endowments have different reputation of turnover. I know the Yale team has an average of over 20-year tenure, which is quite impressive for the space. Let's talk about something that's very sexy to the viewers, which is on the market today, fees, carry. What are you seeing from top

Starting point is 00:30:37 quartile managers? What are they able to dictate for, call it, $20 to $75 million fund size? Being once a multi-asset class investor, getting my head around fees and venture was challenging. We were generally fee-sensitive investors. Whether you look at a real estate fund that has layers of fees within it, or hedge funds that have historically charged $2 20. We were investors at our various institutional places where we were trying to knock down fees. And when you apply every other asset class mentality to venture, you're going to lose every time. And it's something that when we sit across the table from LPs, we try to educate them on this is a very different asset class than any other. Access matters more than anything. And ultimately, you have to pay for that access% or two and a half that steps down that averages to 2% over the lifecycle. So I believe for the top firms, that that two to two and a half

Starting point is 00:31:53 management fee headline is standard, even with the pendulum swinging probably in term in favor of the LP. For the best managers, nothing is going to change. Most of the funds that we are committing to today are doing one and done closes because they have the pedigree, the returns, you know, everything to dictate just one close for, you know, a small fund size. And when you have that demand, you just, you know, you don't have the ability to dictate, oh, you should be a 2% and step down to one and a half over time. Ultimately, it really doesn't matter. I mean, you have to return those fees. You know, very few people realize you the carry only kicks in until you after you return the fee. So from a carry perspective, are you still seeing tiered structures, you know, over going up to 25 and 30% carry for the top managers? How do you look at that?

Starting point is 00:32:46 It was something hard to swallow once, but now we've come to terms a long time ago that that's industry standard. I'd say about half of our GPs have a tiered carry structure, stepping up to 25% or 30% over various multiple hurdles. 4X is a common multiple hurdle. Some have step-ups above a 5X. We think that's great. If you're putting up a 5X, you should get paid accordingly. What do you think is going to happen to the firms who started in the last few years, raised a colossal amount of capital, and whose books are most likely negatively impacted by investing at too high prices? They're either going to have to come to terms with raising a remarkably smaller fund size. If they have some sticky LPs that believe that they still have access,

Starting point is 00:33:33 they'll be able to do that. Or ultimately, they'll lose their capital. And it's still same thing, but they'll lose their capital to the brand name firms that have a waiting list out the door. So it falls into the, you know, not the early stage segment where tourist capital leaves the market, but the style drift or size of the firm category where, you know, those GPs are, they're going to have to do an about face in some shape or form, they're going to have to tell LPs, like, we raised too much capital, we ended up investing a lot later and at a lot higher valuations than we should have been. You know, we realize that now. And, you know, we're going to get back to what we know. We'll see probably very few GP. I mean, we don't invest in that segment

Starting point is 00:34:20 per se. But I don't think you'll see very many GPs kind of do that about face. I was having dinner and a conversation last night with a GP, you know, who flew into Texas. And we were talking about founders fund, you know, and the fact that they raised a billion eight, and they decided to, you know, cut it in half, but basically reserve the next 900 million for their next vintage. It basically means that founders fund, you have to wait seven years to be able to invest in the next investable vintage between basically of two vintages that are oversubscribed now. So I think that's smart on a GP's perspective to say, we probably raised too much, but solicit

Starting point is 00:35:04 LP approval and cut the number and that's reserved for the next vintage. And that's a smart way to do it. But to your point, if there's these zombie portfolios out there, it's going to be LPs will see through it pretty quickly. I think the founders fund strategy was very long term greedy and a smart and LP friendly strategy. Going to your own portfolio, we oftentimes talk about power laws within a venture portfolio. How does your return dispersion work? Are you seeing you're sometimes investing in five, $10 million funds? Are you ever putting up a 10x? How do you look at your returns and examining back the last decade of investing in this asset class, how do you look at your own

Starting point is 00:35:45 portfolio? It truly sort of exemplifies the power law, at least in our fund one portfolio. So we have 11 GP relationships, 592 companies, although that number is changing because there's company mortality, which we haven't seen in a long time. But so maybe now I think it's 542 companies in the portfolio. The top 25 represent 77% of our fair market value. As of March 31st, which was net of a 3x return, the top five represent 50% of the fair market value. So the you know, the power law, you know, in a portfolio of 540 companies is, it still works. You know, the diversification benefits don't sort of diversify venture returns away. You're just getting more shots on goal with the approach. You know, when you look back over the past decade, you decade, the thing we tell any LP across the

Starting point is 00:36:47 table, a fund of funds might not be the right approach for you. You might have the bandwidth and the access to go build a direct venture program, but don't cherry pick one or two funds out of our portfolio. Do them all. If you're going to go and build it, do them all because in order to achieve that power law, you need shots on goal. Last week, I was sitting with an LP and he was asking if he should invest in XYZ's opportunity fund. And I was like, well, sure, but then you should do everybody's opportunity fund. We try to educate LPs across the table, whether they're existing perspective or never will invest on the benefits of the power law,

Starting point is 00:37:30 how it works in a fund of funds. But if you're going to go build it yourself, picking one GP is a dangerous game because you inevitably are going to be disappointed with the results. How do you think about ownership at seed? Because on the one hand, there's the box groups, the shrugs, even our village global who target 5% ownership, sometimes more, who are collaborative firms in nature. They're the second biggest firm in the cap table, the third biggest firm, and they can collaborate with the best firms in the world. On the other hand, you have firms who get 10%, 15% in lead rounds, but they're competitive, and they can't be in any of the deals by the other top firms because they're not in a room. Michael Kim strongly recommends the latter to his portfolio

Starting point is 00:38:10 firms that lead and get 10%, 15% ownership. How do you think about what ownership model you prefer? We prefer to invest with firms that have a high ownership mindset. And that means 10% or more generally, running 30 to 40 portfolio companies. We have some funds or one fund that has a 20 portfolio company portfolio with 15 to 20% ownership across every company in their portfolio. It is something we certainly look for. We've known Michael for a long time. We respect Michael. We collaborated across GP relationships and sit on similar ELPAC advisory boards. And we started kind of investing in the space at a similar time. We're not so rigid with every GP about it on the ownership. I'll give you Bling as an example. When Bling was investing between

Starting point is 00:39:06 their fund two and fund three, they talked about this rigidity. They are very valuation and ownership sensitive. But they've realized that after they make that investment, they get to know the company better. They help the company. They have a hundred person product advisory council, and they're helping founders you know, founders with product market fit from that seed to series A, and they have the ability to get more ownership over time. And so the rigidity in, you know, a fund saying we will only invest if we get a certain amount of ownership at that first check, you know, led

Starting point is 00:39:43 bling, and Ben would admit it, to miss out on some opportunities versus as they kind of assess the fact that they could pick up more ownership over time because of how useful or valuable they were to a founder, the net effect was better in favor of it not being so rigid. So I would say we're flexible with our GP relationships, we advise them to do what's right, you know, and best for the portfolio. And, you know, if they believe that this check, the one that they're writing at a 5% ownership is fund returning, they should do it. And if they they believe that they can, you know, lean in over

Starting point is 00:40:21 time, we're okay with that. I think something that both Eric and I have seen over and over interviewing the top people is that they have a very conscious strategy that they try to execute, but they don't become fixed on and they don't become overly dogmatic. So you've been very generous with your time today. You've allowed us to really delve into economics and other trade secrets. What would you like people to know about Summit Peak? Obviously we are very niche in what we do at the early stage. You know, we're a hybrid model.

Starting point is 00:40:52 I think that's what's different besides kind of that super niche focus on the pre-seed-seed segment of the market. We're only in the US, we don't do anything outside. And our hybrid model, we believe, will have long term benefits, which is to say, the co investment piece of our portfolio drives down and kind of negates the fund to fund stigma or the fees on fee model, as well as diminishing the J curve, producing

Starting point is 00:41:20 meaningful DPI early in a fund's life. And so, you know, that's kind of the elevator pitch on us. If there's any idiosyncratic asset class in the world that lessons from other asset class does not translate it into that's venture capital. And I think it's probably one of the biggest mistake that single family offices and what you would call tourist capital make in the asset space. I think there's a significant room for funds like Summit Peak and others. Thank you again. I could see why Julian introduced us. Thank you again, Julian Shapiro for the introduction. And thank you for taking the time to speak with Eric and I. Thank you guys. I appreciate it.

Starting point is 00:41:57 Thanks for listening to Limited Partner Podcast. If you like this conversation, please like, subscribe and review on YouTube, Spotify or Apple. Thank you for your support.

Investing Billions - E8: Apurva Mehta, Managing Partner of Summit Peak Investment | How the Top 5 Companies Drive 50% of Returns, Why Fee Sensitivity is Foolish, and Why Family Offices are the Best LPs

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